Lentral banks have lost sight of their price stability mandate. In April, inflation in the United States was 8.3% over twelve months (8.5% in March). After raising the target zone for the federal funds rate by 50 basis points at its May meeting and then by 75 points in June, the US Federal Reserve (Fed) has indicated its intention to apply a further hike 75 points at the end of July. Everyone at the May meeting agreed that the US economy was very strong, the labor market extremely tight and inflation well above target. Yet they decided it was up to“move monetary policy quickly towards a neutral position”. However, it is necessary to adopt a restrictive monetary policy, and not ” neutral “ !
The tightening of the Fed’s balance sheet is also minimal. From June, its assets will be reduced by 47.5 billion dollars (44.8 billion euros) each month for three months, then by 95 billion per month. These figures may seem considerable, but it is worth remembering that the balance sheet of the Fed had reached almost 9,000 billion dollars at the end of March 2021! At the current rate, it will take more than seven years to return to the level of September 2008, before the Fed begins to erect its wall of liquidity around the financial markets.
The Fed isn’t the only major central bank to lag inflation. The Bank of England (BOE) key interest rate currently stands at 1.25%, after an all-time low of 0.1% in March 2020. However, the BOE has limited its increases to 25 points. base rate and projects an implicit market bank rate of around 2.5% in mid-2023 and 2% in 2025. This projection is far too low! Inflation in the UK rose from 7% in March to 9% in April, and is expected to exceed 11% during 2022. The BOE expects a slowdown in growth to bring inflation back to its target of 2% in 2024. This scenario is unlikely without additional monetary tightening.
Risks of overheating
Monetary policy is just as inexplicable in the euro zone, where inflation reached 8.1% in May, after 7.4% in April. The main interest rate of the European Central Bank (ECB) remains at zero, and its deposit rate at −0.5%. ECB President Christine Lagarde confirmed on June 9 that the ECB would set a 25-point rate hike in July and September. But even if the ECB increased them by 50 points, the deposit rate would only reach 0.5%. Inflation should thus remain well above the target, and given the low unemployment rate of 6.8% in April, the economy will approach overheating. The reluctance of the ECB exceeds that of the Fed and the BOE.
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